Investment income – VAT treatment

The acquisition or disposal of shares and other securities by a charity is not a business activity for VAT purposes.

Therefore, any VAT incurred in relation to that activity cannot be recovered. In National Society for the Prevention of Cruelty to Children (NSPCC) [1992] (LON/92/602X) the Tribunal held that the charity’s investment activities, though substantial, did not amount to a business activity because the charity was not predominantly concerned with those supplies. See also the Wellcome Trust case as well as HMRC Manual VCHAR3900 on share dealing by charities.

Investment income is usually a non-business activity; but following the decision in Church of England Children’s Society v Customs and Excise Commissioners[2005] EWHC 1692 (Ch) (29 July 2005) [see also the section on Input Tax Recovery] HMRC announced that charities are able to reclaim some VAT on investment management fees to the extent that the income was used to support their taxable business activities.

The Upper Tribunal upheld the First tier Tribunal’s decision that the University of Cambridge (HMRC v University of Cambridge(2015) UKUT 0304 TCC)) was entitled to recover certain VAT incurred on the investment management fees that it incurs. These costs relate to the management of the significant endowment fund, made up primarily of donations and other gifts. Because the income from the endowment fund was distributed across the University in support of all of its activities (which include VAT exempt education as well as taxable supplies of research, academic publishing and consultancy services), the VAT on these costs could be treated as an overhead of the entire activities that were being carried out. HMRC has appealed this decision to the Court of Appeal, which decided to refer a number of questions to the CJEU having assessed that it required greater clarity on certain points in thecase on VAT and investment management fees. A full commentary on this case by CTG VAT adviser Graham Elliott can be read here.